Classification of goodwill

Classification of goodwill

Goodwill may be classified into acquired goodwill and self-generated goodwill.

(i) Acquired or purchased goodwill

Goodwill acquired by making payment in cash or kind is called acquired or purchased goodwill. When a firm purchases an existing business, the price paid for purchase of such business may exceed the net assets (Assets – Liabilities) of the business acquired. The excess of purchase consideration over the value of net assets acquired is treated as acquired goodwill. The Indian Accounting Standard 10 (AS10) on accounting for fixed assets states that goodwill must be recorded in the books of accounts only when some consideration in money or money’s worth has been paid for it. Therefore, acquired goodwill can be recorded in the books of accounts and is shown on the assets side of the balance sheet under fixed assets.

(ii) Self-generated goodwill

It is the goodwill which is self generated by a firm based on features of the business such as favourable location, loyal customers, etc. Such self-generated goodwill cannot be recorded in the books of accounts.